Upscale jeweler Tiffany & Co. (NYSE:TIF) continues to reel as consumers shun big-ticket items and non-discretionary merchandise. However, recent results suggest that sentiment is slowly beginning to improve, in preparation for the day when Tiffany comes back in full fashion.

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Quarterly Review
Net sales for Tiffany & Co. fell 16% to $612.5 million, primarily in woeful trends in the Americas segment where sales fell 23% (53% of total sales) and same-store sales declined 27%. Sales at the flagship New York store fell 30%. European sales (11% of total sales) fell a much more modest 4% but rose 13% on a constant currency basis as comparable store sales improved 5%. Asia Pacific sales fell 1% (35% of total sales) as positive sales in most countries in the region was offset by negative trends in Japan. Sales fell 3% and comps declined 4% excluding currency fluctuations. Rounding out the sales channels, U.S. internet and catalog sales fell 8% while other sales plummeted 66% on lower demand for diamonds in the wholesale market.

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Profitability suffered, due to the dramatic sales decline and higher product costs lowered gross margins to 55.1% of sales. Management did manage to lower SG&A costs 14%, push net inventories down 4%, and did benefit from a lower quarterly income tax rate. The end result was a 27% decline in earnings to 46 cents per diluted share, though this did outperform analyst projections by a wide margin (Learn more on our Fundamental Analysis Tutorial.)

Outlook
Tiffany also raised its full-year projections, though it still expects a sales decrease of 10% as America's sales should decline in the mid teens and mid-single digits in the other major geographic segments. Operating margins will also decline, while earnings from continuing operations should come in between $1.65-1.75 per diluted share. During the first quarter, earnings update it also mentioned plans for full-year free cash flow of approximately $400 million, or more than $3 per share based on current shares outstanding. (Find out how to put this important component of equity analysis to work for you, see Analyzing Operating Margins.)

The company plans to grow its total store base by 6% during the full year, and ended the quarter with a modest store count of 211, which is up about 8% year over year. This is in stark contrast to Zale Corporation (NYSE:ZLC), which recently announced plans to close 118 locations. Zales operates more middle-of-the-road namesake stores and a few remaining Bailey, Banks & Biddle locations that were intended to capture share at the higher end of the market. Signet Jewelers (NYSE:SIG), which also operates midscale chains such as Kay Jewelers and Jared, reported a modest sales decline of 1.1% as comps declined 2.9%.


The Bottom Line
Shares of Tiffany gained more than 8% after the earnings announcement and now trade at more than 20 times forward earnings guidance. The free cash flow multiple is much more reasonable, but the shares now more fully discount any eventual recovery in sales and profit levels. This still pales in comparison to online rival Blue Nile (Nasdaq:NILE) that trades at more than 70 times earnings expectations for the coming year. Blue Nile posted a more modest 5.2% decline in second quarter sales as earnings came in about flat.

With the benefit of perfect hindsight, Tiffany's stock was a steal back in March and November, when it fell below $20 per share. It's much less of a bargain right now and current sentiment favors rivals operating at the middle of the market. However, over time, shoppers will inevitably rediscover their upscale tastes.

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